A variety of vendors are now offering
overlay management software via unified managed accounts, allowing
wealth managers to execute preset investment strategies with
automated decisions about when to buy, sell or hold the investments
within it. They are fully customisable and provide a holistic view
of the client’s holdings.
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Wealth management platforms built
around overlay management are helping to improve the performance of
clients’ investments in volatile markets – and by doing so, are
attracting renewed attention.
Overlay management involves the use of
sophisticated software that helps advisers maintain a constantly
changing mix of investments optimised for the maximum return within
the smallest tax footprint. The process requires putting all of a
client’s investments – from stocks to mutual funds to
exchange-traded funds – into a single, unified managed account
(UMA).
Advisers then use overlay management software,
purchased from vendors such as Fiserv’s CheckFree, Smartleaf or
SunGard, among others, to execute a preset investment strategy with
automated decisions about when to buy, sell or hold the investments
within it. Overlay systems can be customised in an endless array of
strategies, allowing wealth managers to gain a holistic view of the
client’s holdings.
UMAs built on overlay systems are hot – assets
within accounts that use overlay management are poised to grow 35
percent per year, reaching $327 billion by 2013, according to the
Boston research firm Celent.
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By GlobalDataBroad appeal
Overlay systems can work at all ends
of the wealth market, said Paul Oliu, marketing manager for
Fiserv’s Investment Services division, which offers one of the most
popular overlay products for the wealth management market, the
Model Management Solution.
“Wealth managers can gain a tremendous amount
of efficiency by taking a holistic approach to the portfolio and
rebalancing and tax implications,” Oliu said. “Overlay gives wealth
management a level of sophistication that can really maximize
investment strategies while providing real-time analysis and
reporting. It is a reflection of the convergence already taking
place in wealth management.”
Overlay gives money managers a dynamic view of
the client’s entire portfolio, breaking down the silo approach of
single managed accounts (SMAs) in ways that allow new strategies to
emerge from the analysis.
“Most managers within a bank’s wealth
management unit are in charge of strategy for just a slice of a
client’s overall asset mix, so they may not know much about mutual
funds and other investments the client holds outside the bank,”
Oliu said. “With overlay, if a client has too many shares of stock
in one sector spread across different types of investment vehicles,
the client’s portfolio manager knows to hold off buying more shares
in that sector.”
From automated rebalancing that accounts for
portfolio risk to constant tax scenario maximisation, overlay
managements systems replace many labour-intensive tasks of
portfolio management with real-time monitoring preset by managers
working with the client base.
Overlay technology has also made it much
easier for bank trust departments to confidently move beyond the
walls of the bank to outside money managers and facilitate that
overlay outside the trust. That way the trust gains access to an
investment style – one with a focus on international or small-cap
stocks – that the bank does not provide in-house.
So now, instead of sending money to an outside
manager, banks can now buy that manager’s investment advice, in the
form of model portfolios. Overlay technology allows bank trusts to
invest based on those instructions in a way that is co-ordinated
with the larger portfolio.
New support
infrastructure
In another sign of model portfolios’
growing popularity, Fiserv recently introduced a communications
infrastructure designed to better transmit models between asset
managers and clients, including bank trust departments.
Fiserv’s Model Information Exchange lets
investment managers send information at one time, in a standardised
format, to multiple sponsors who then can act on the suggestions.
Investment managers typically send portfolio updates daily. Instead
of sending, say, a set of instructions separately to 10 sponsors,
the instructions can be loaded and sent to all the sponsors at
once. That lessens the possibility of a sponsor getting
instructions too late to act on them.
An increasing number of bank trust departments
have been adopting investment management that includes a model-only
option within unified managed accounts. This approach is intended
to provide tax benefits and better asset allocation.
The model portfolio business is growing
quickly; according to Cerulli Associates, 84 percent of asset
managers now offer model portfolios, up from 50 percent in
2006.
Mike Cifrese, a product strategist at Fiserv,
said that banks and trusts are extending their reach and seeking to
work with a broader range of clients.
“Overlay systems make it possible to extend
the business model in a way that does not necessitate adding lots
of managers and staff each time you gain client base,” he said. “It
is a really smart way to grow the business. The large organisations
are in overlay in a big way, but we also have a lot of registered
investment advisers looking an overlay solution, as well as some
smaller banks as well. Everyone is looking for ways to provide
wealth management these days.”
The Fiserv platform for managing UMAs recently
surpassed one million sleeves, reinforcing the company’s position
as the industry leader in the UMA marketplace, with nearly 70
percent of industry participants utilising its UMA
functionality.
Over the past 12 months, mutual fund advisory
(MFA) accounts also achieved significant growth, a reflection of
Investment Services’ competitive advantage in this market. The key
features in MFA include a specific design for MFA, automated
portfolio rebalancing, automated systematic processing and the
ability to handle Exchange Traded Funds (ETFs) along with core
portfolio management portfolio accounting, performance and
management reporting, reconciliation tools, and interfaces to
enable straight through processing.
Financial Advisor Workbench, a solution
designed for the “rep as manager” market, also expanded its account
base and users significantly over the past 12 months. The current
and expected growth in adviser-based accounts is attributed to the
current economic environment, and will have a significant impact on
the new capabilities added to this adviser-based platform,
including option trading and support.
